Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements. Our financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2012 and December 31, 2011, consisted of the following (in thousands):

			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		Unobservable inputs
Description	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Liabilities - Contingent consideration liability	$	6,904	$	—	$	—	$	6,904
			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		Unobservable inputs
Description	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets - Marketable securities	$	2,798	$	2,798	$	—	$	—
Liabilities - Contingent consideration liability	1,290		—		—		1,290

Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Certain of our business combinations involve the payment of future contingent consideration based on a percentage of future related product sales and one of our business combinations involves the payment of future continent consideration of $1.0 million upon attaining a specified future revenue milestone. See Note 5 for further information regarding these acquisitions. The fair value of the contingent consideration is re-measured at the estimated fair value at each reporting period with the change in fair value recognized within selling, general, and administrative expenses in the accompanying consolidated statements of income. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent liability during the three and nine months ended September 30, 2012, were as follows (in thousands):

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2012			2012
Beginning balance	$	6,738		$	1,290
Contingent consideration liability recorded as the result of acquisitions (see Note 5)	—			5,000
Initial purchase price adjustments finalized over the period (see Note 5)	280			280
Fair value adjustments recorded to (income) expense during the period	(90		)	370
Contingent payments made	(24		)	(36		)
Ending balance	$	6,904		$	6,904

The recurring Level 3 measurement of our contingent consideration liability includes the following significant unobservable inputs (amount in thousands):

Contingent consideration liability	Fair value at September 30, 2012		Valuation technique	Unobservable inputs	Range
Revenue-based payments	$	6,904	Discounted Cash Flow	Discount rate	10% - 14.5%
				Probability of milestone payment	90%
				Projected year of payments	2012-2028

The contingent consideration liability is re-measured to fair value each reporting period using projected revenues, discount rates, probability of payment for the $1.0 million revenue-based milestone payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases (decreases) in discount rates and the time to payment may result in lower (higher) fair value measurements. A decrease in the probability of any milestone payment may result in lower fair value measurements. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value measurement.

Our determination of the fair value of the contingent consideration liability could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to selling, general, and administrative expenses in our consolidated statements of income. As of September 30, 2012, approximately $6.2 million was reflected in other long-term obligations and $735,000 was reflected in accrued expenses in our consolidated balance sheet. As of December 31, 2011, the entire balance was reflected in other long-term obligations in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.

During the three and nine-month periods ended September 30, 2012, we had losses of approximately $17,000 and $27,000, respectively, compared to losses of approximately $42,000 and $59,000, respectively, for the corresponding three and nine-month periods ended September 30, 2011, related to the measurement of non-financial assets at fair value on a non-recurring basis subsequent to their initial recognition. 

The carrying amount of cash and cash equivalents, receivables, and trade payables approximates fair value because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value, as determined by borrowing rates estimated to be available to us for debt with similar terms and conditions. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1).